When investing, as in horror films, the most terrifying villains are the ones we thought were dead. Stagflation that economic nightmare of the 1970s characterized by stagnant growth paired with persistent inflation was supposedly dead and buried decades ago. But like any good movie monster, it’s clawing its way back to the surface, and Americans need to prepare for its return.
The warning signs are unmistakable. Despite the Federal Reserve’s aggressive rate-hiking campaign over the past two years, inflation remains stubbornly above target. February’s Consumer Price Index showed prices still rising at 3.2%, while previous months have delivered unwelcome upside surprises. Meanwhile, GDP growth has begun to sputter, at just 1.6% in the first quarter, down sharply from 3.4% in late 2023.
Even more alarming, the Atlanta Federal Reserve’s closely watched GDPNow forecast model has recently slashed its second-quarter growth projection. When the Fed’s regional banks signal economic deceleration while inflation persists, the stagflation alarm bells should be ringing loudly.
This toxic combination represents the classic stagflation recipe: prices rise faster than paychecks while economic momentum simultaneously loses steam. Conventional economic models struggle to address this scenario, as policies that fight inflation typically hamper growth, while growth-boosting measures often exacerbate inflation.
Stagflation is particularly pernicious because it confounds traditional economic remedies. When inflation and unemployment rise simultaneously, policymakers face an impossible choice between fighting one problem while exacerbating the other.
The warning signals extend beyond inflation and growth statistics. Federal agencies have begun implementing hiring freezes and initiating workforce reductions as budget pressures mount. The Bureau of Labor Statistics reported that federal government employment declined by 5,000 jobs in January alone, with more cuts potentially looming. These job losses contribute to economic stagnation without addressing the underlying inflation problem.
The stagflation monster may be back, but America has faced and overcome economic challenges throughout its history. By understanding the nature of the threat and taking appropriate actions both as individuals and as a society, maybe we can weather this economic storm and emerge stronger on the other side.
Elliott Owen Lipinsky
Attorney and Counselor at Law
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